Oct 25, 2018
Executives
Brad Borggard - Senior Vice President, Corporate Planning and Capital Markets Craig Bryksa - President and Chief Executive Officer Ken Lamont - Chief Financial Officer Ryan Gritzfeldt - Chief Operating Officer
Analysts
Cody Kwong - GMP FirstEnergy Travis Wood - National Bank Financial, Inc. Jordan McNiven - Tudor, Pickering, Holt & Co.
Adam Gill - Eight Capital Juan Jarrah - TD Securities Inc.
Operator
Good morning, ladies and gentlemen. My name is Krystal, and I will be your conference operator for Crescent Point Energy's Third Quarter 2018 Conference Call.
This conference call is bring recorded today and will be webcast along with the slide deck, which can be found on Crescent Point's website homepage, at www.crescentpointenergy.com. The webcast maybe not be recorded or rebroadcast without the expressed consent of Crescent Point Energy.
All amounts discussed today are in Canadian dollars, unless otherwise stated. The complete financial statements and management's discussion and analysis for period ending September 30, 2018, were announced this morning and are available on Crescent Point's website and on the SEDAR and EDGAR websites.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for members of the investment community.
[Operator Instructions] Thank you. During the call, management may make projections or other forward-looking statements regarding future events or future financial performance.
Actual performance, events or results may differ materially. Additional information or factors that could affect Crescent Point's operations or financial results are included in Crescent Point's most recent Annual Information Form, which may be accessed through Crescent Point's website, the SEDAR website, the EDGAR website or by contacting Crescent Point Energy.
Management also calls your attention to the forward-looking information and non-GAAP measures sections of the press release issued earlier today. I will now turn the call over to Brad Borggard, Senior Vice President, Corporate Planning and Capital Markets.
Please go ahead, Mr. Borggard.
Brad Borggard
Okay. Thank you, operator.
I'd like welcome everyone to our third quarter conference call. With me are Craig Bryksa, our President and Chief Executive Officer; Ken Lamont, our Chief Financial Officer; and Ryan Gritzfeldt, our Chief Operating Officer.
As the operator highlighted, the call is being webcast, and you can find the slide-deck on our website under the Invest tab. Craig?
Craig Bryksa
Thank you, Brad. And thank you everyone for joining us.
Today's call provides an overview of our operating and financial results, oil differentials within the Canadian marketplace and a reminder of our updated strategy. In early September, we announced a transition plan and key deliverables that were designed to ensure Crescent Point becomes a more focused, return-driven company, with a stronger balance sheet.
In particular, we expect to generate increased free cash flow through a more disciplined capital program and cost savings. Although we're in the very early stages of implementing our plan, we have completed the reorganizational restructuring we announced last month.
We expect the reorganization to result in approximately $50 million of annual cost savings starting in the fourth quarter of 2018. Crescent Point achieved strong operating and financial results in the third quarter.
We remain disciplined with total expenditures, including dividends within funds flow from operations. Based on results to date, we are on track to meet or exceed our 2018 production guidance of 177,000 boe per day and keep capital expenditures on target.
Our strong operating results have been slightly offset by wider than normal Canadian oil differentials. Based on the settled index pricing and current forward pricing, we expect our fourth quarter crude oil selling price per barrel to be approximately 15% less than the third quarter 2018.
This compares to an MSW base selling price that is expected to be approximately 30% less during the same period. Fortunately, our realized pricing has been slightly stronger than other industries in Canada.
This is due to the fact that we are a light oil producer, with 90% of our production located downstream of recent apportionment points or situated in the United States. Given the importance of this topic, later in the call, Ryan will elaborate on our various product streams in the context of the Canadian oil market.
I will now pass things over to Ken to discuss our financial results. Ken?
Ken Lamont
Thank you, Craig. During the third quarter, we generated funds flow from operations of $475 million or $0.86 per share diluted, including an operating netback of $41.14 per boe.
Capital expenditures totaled $416 million. This includes approximately $366 million on drilling and development activities, drilling 169 net wells; approximately $45 million spent on facilities and seismic; and approximately $5 million spent on land.
We remain on target to meet our annual capital expenditures budget of $1.775 billion, and expect to increase our free cash flow generation in 2019. Third quarter G&A expenses totaled $29 million or $1.81 per boe, including $5.7 million of incremental severance costs associated with the recent organizational restructuring.
Savings from this restructuring are expected to be realized starting in the fourth quarter of 2018, a portion of which will be directed towards reducing our G&A, operating expenses and capital costs. As a part of our transition plan, we are also anticipating achieving further savings from initiatives targeting operating expenses and capital costs.
With higher commodity prices and increased production from our U.S. assets, royalty expenses increased slightly during the third quarter to 16% of our oil and gas sales, up from 15% in the prior year.
Funds flow from operations for the quarter also benefited from higher commodity prices net of increased hedging losses. Our hedging policy is designed to protect our cash flows and balance sheet in the event of lower commodity prices and reduces speculation on the direction of future pricing.
As at October 19, 2018, Crescent Point had, on average, over 40% of its oil and liquids production, net of royalty interest, hedged for the remainder of 2018 and 2019 at a weighted average market value price of approximately CDN$78 per barrel. Our preliminary 2019 guidance remains unchanged with expected capital expenditures of $1.55 billion to $1.6 billion, an average production of 176,000 to 180,000 boe per day.
We plan to announce our formal 2019 guidance upon the completion of our 2018 program. I will now hand things over to Ryan for an operational update.
Ryan Gritzfeldt
Thanks, Ken. Our third quarter production totaled 174,275 boe per day and takes into account approximately 4,800 boe per day of non-core dispositions that closed at the end of second quarter.
Our fourth quarter production estimate is currently tracking ahead of forecast, based on annual guidance of 177,000 boe per day. As Craig highlighted earlier, oil differentials within Canada have widened significantly for both light and heavy grades, however, not all producers are affected equally.
90% of our oil production is located either in the United States or downstream of recent apportionment points. As a result, our average crude oil selling price has not been impacted as significantly as other index prices in Canada as we are not a significant producer of either MSW light at Edmonton, or heavier WCS crude, which currently have the largest differentials in Canada to WTI.
Approximately 45% of our third quarter oil production was priced off of the Light Sour Blend or LSB benchmark produced in Southeast Saskatchewan, and our U.S. assets, which are located in the Uinta Basin in North Dakota, and are not subject to Canadian differentials, represented approximately 25% of our third quarter oil production.
So these assets combined, were 70% of our total oil production, currently receive a premium relative to MSW light at Edmonton. Finally, our Southwest Saskatchewan assets, which account for 20% of our corporate oil production, produced a medium gravity crude that accesses Fosterton pricing, which currently received a premium to WCS.
As we finalize our 2019 guidance, we will continue to monitor the outlook for oil differentials and their impact on overall corporate returns. Another topic of interest, I'd like to address is the Canadian Federal Governments carbon pricing backstop announcement this week.
We expect this policy to apply to Crescent Point's Saskatchewan operations, beginning in April 2019. The direct impact from the federal carbon pricing is expected to be minimal, with incremental costs representing less than 1% of annual funds flow from operations.
Our capital investments in operations continue to reflect Crescent Point's commitment to environmentally responsible development. Turning now to our third quarter operational highlights.
As was outlined in our September strategy update, Crescent Point is focused on improving its capital efficiencies and capital allocation process. In the Flat Lake area, our returned focus development strategy is expected to generate improved efficiencies by utilizing new facilities, implementing pad drilling and reducing costs.
In Utah, we are shifting our program primarily to two-mile horizontal wells, including stacked, multi-well pads. We expect this transition to positively impact our 2019 capital efficiencies.
We also continue to pursue new opportunities for increased market access, before allocating additional capital to this resource play. We continue to steer our capital allocation process towards a more consistent level of capital activity including the advancements of decline mitigation programs.
Before Craig concludes our conference call, I'd like to thank our field staff for their hard work and continued execution during our organizational restructuring.
Craig Bryksa
Thank you, Ryan. As we conclude, I would like to reiterate our deliverables, that we are committed to achieving over the next 12 to 24 months.
By reducing the number of areas in which we operate, we will enhance efficiencies, through our disposition process, we will remain disciplined and ensure appropriate values are realized for shareholders. We plan to reduce our net debt to funds flow from operations to 1.3 times or less in the context of commodity prices.
By improving our cost and capital structure by greater than 6%, excluding changes in commodity prices, we plan to ensure a funds flow from operations netback, increase our funds flow from operations netback. And lastly, we are focused on increasing free cash flow generation through improved capital efficiencies, cost reductions, the application of decline rate mitigation techniques and following a disciplined capital allocation process.
When we have made substantial progress on our deliverables, we will update our shareholders. Before we open the line for questions from the investment community, I would like to thank our shareholders for their continued support and our employees for their hard work and dedication.
I'll now turn it back to the operator.
Operator
Thank you. [Operator Instructions] And our first question comes from Cody Kwong from GMP FirstEnergy.
Your line is open.
Cody Kwong
Hi, guys. To the extent you can, can you give us some color on how the planned divestiture activity is progressing in the markets in here now?
And maybe give us some comments in the context of how these processes might be impacted by the recent widening of differentials?
Craig Bryksa
Hey, Cody, it's Craig. Thanks for the question.
So to be honest, Cody, this is a question we're getting a lot right now on the road and even just coming through the IR team here in house. So on September 5, we laid out our strategy, we think it's the right strategy, it's a very good strategy for Crescent Point at this time.
And really there's two major change that I want you to think of, in that strategy. First, we want to focus the company.
We currently - we described ourselves in the past as being a fairly focused company, but when you look at us, we've really been operating in 11 areas, we want to pair that down to about 5-ish to really focus and become more efficient. Second, real theme out of the strategy is balance sheet strength.
And our balance sheet isn't that bad. We're currently a little over two times debt to cash flow.
We've got $1.7 billion of liquidity on our line. So our balance sheet isn't that bad, but we want to be able to strengthen that.
And one of the levers for us to strengthen the balance sheet is through dispositions. So we've identified 50,000 barrels a day of assets that we would like to get off over time.
It's going to take time, and with the macro market that we're living in, both on commodity prices and then recently with differentials. This is something that we are going to be very disciplined too.
We're going to ensure that we get fair value for the assets that we do sell. It doesn't do us any favors to just blow assets out the door for discounted rates, so we're not going to do that by any means.
So what you're going to see from us is very flexible but disciplined process, a very methodical here over the next 12 to 24 months as we reshape the company. And then as deals are done, and we have news, we will let the market know at that time.
I don't want to get into the point here, we've backed us into any corners saying, we're going to sell this asset or said dollar amount in this quarter. We are working through the process.
We've got a number of irons in the fire, and when we do have an update on that, we'll let the market know.
Cody Kwong
Okay. Thank you.
Operator
Thank you. Our next question comes from Travis Wood from National Bank.
Your line is open.
Travis Wood
Yes, I think, Cody, kind of took the question that I wanted to start off with, but maybe just kind of expanding on - I missed some of your opening remarks around the marketing, so if you touched on this, my apologies. But can you talk about rail?
You guys have a rail terminal, there's obviously a lot of arbitrage to be captured and value within that the supply chain. So are you utilizing rail at the moment?
Or - and if not, is there the ability to kind of take the fee-for-service for third-party volumes at all?
Ryan Gritzfeldt
Hey, Travis, it's Ryan. Yeah, good question.
So at the moment, we're not using our rail facility in Southeast Sask. Obviously, we've been working the numbers, looking at deals, from that perspective as you know obviously, any deal, rail companies are looking for some term on that.
So at this 10 seconds, we don't have any deals in place on that front, we continue to explore that as well as a few other options such as trucking into North Dakota for some of our volumes. So, yeah, nothing to report on the rail front at this 10 seconds.
Travis Wood
Okay. And can you remind us what the capacity of the facility is?
Ryan Gritzfeldt
Yeah. So back a few years ago, when we were railing quite a large volume out of our Viewfield Bakken, it was upwards of 30,000 barrels a day.
We probably have the capacity to get that up to 40,000 barrels a day at that facility.
Craig Bryksa
Maybe mention Southwest as well.
Ryan Gritzfeldt
Okay. Yeah.
We also have rail capacity in our Southwest Saskatchewan property as well, and Utah, which we're actually using our Utah rail facility to clear spot barrels, when there are unplanned turnarounds at the refineries in Salt Lake City.
Travis Wood
Okay. And - is the - for Southwest Sask¸ where, I feel like that's where most of this bottleneck is in the system.
What's the capacity of rail in Southwest?
Ryan Gritzfeldt
Yeah. We're both 10,000 to 15,000 barrels a day of capacity there, Cody.
Travis Wood
It's Travis.
Ryan Gritzfeldt
Sorry, Travis. Sorry, Travis.
Travis Wood
That's fine. I have more hair.
That - okay, so 30,000 in Southeast and then still kind of, call it, 40,000 to 45,000 corporately with the ability to ramp up the Southeast another 10,000?
Ryan Gritzfeldt
That's correct. Yeah.
Travis Wood
Okay. That's all.
Thank you.
Ryan Gritzfeldt
Yeah. Thank you.
Operator
Thank you. [Operator Instructions] And our next question will come from Jordan McNiven from Tudor, Pickering, Holt.
Your line is open.
Jordan McNiven
Hey, guys. Quick question just on the oil and NGL mix.
Looks like a little bit of a shift from what we've become accustomed to, is there any color on that around, what is the case maybe what you expect going forward?
Craig Bryksa
So that's just a prior period adjustment here that we took in Q3. Just with some downtime issues with our NGL sales in Q2.
So that's just being reflected now into Q3. So we don't expect that going forward.
It's just a onetime blend.
Jordan McNiven
Okay, great. And then a second quick question.
Just in terms of the Southwest Sask and then Shaunavon stuff, primarily given similar crude specs to kind of the WCS stuff, relative approximately to Hardisty, do you think there is risk of any contingent [ph] in that market from what we're seeing at WCS. And if that is the case and given the rail stuff we just discussed, is there opportunity maybe to try to shift that down into Montana or any other options?
Craig Bryksa
So currently right now, our pricing on the Shaunavon is Fosterton. So it's roughly, call it on any given date, $10 to $11 better than WCS pricing.
As far as the shift in the Hardisty, Ryan's probably the best person to speak to that. I don't know.
Ryan Gritzfeldt
Yeah, obviously, we're not right now. But, I mean, we continue to evaluate all those options, trucking to different locations.
But, again, with that premium we're getting for our Fosterton crude right now compared to WCS, again, downstream of apportionment points. We're just keeping our crude on pipelines right now.
Jordan McNiven
Great. Thanks, guys.
Ryan Gritzfeldt
Thank you.
Operator
Thank you. And our next question comes from Adam Gill from Eight Capital.
Your line is open.
Adam Gill
Good morning, gentlemen. A quick question on differentials, we've seen some of the pressure that we've seen in Alberta on light oil differentials, heavy oil differentials start to creep into markets east of Alberta.
Can you give us any color on how pricing has been looking for October and your November nominations? Thanks.
Ryan Gritzfeldt
Yeah, so I think just to reiterate what Craig and Ken mentioned, so yeah, based on the October and November stream indices having settled, December trading starts next week. And based on, obviously, WTI strip for November/December, that's where we've calculated that our Q4 realized pricing will only be about 15% lower than Q3.
And to put that into perspective, like Ken mentioned, through those same calculations, we expect the MSW Edmonton light pricing to be approximately 30% less in Q4 than in Q3. But it's important to highlight which - and we have in our corporate presentation that about only approximately 10% to 12% of our crude actually receives MSW light at Edmonton pricing.
So I think that's where we've kind of differentiated and calculating that our Q4 average realized price will only approximately be 15% lower than Q3.
Adam Gill
Okay. Thanks, guys.
Ryan Gritzfeldt
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Juan Jarrah from TD Securities.
Your line is open.
Juan Jarrah
Thank you. Thank you, everybody, and thanks for taking my question.
So my question is really on 2019. Just want to get a sense of where you're seeing and what the government - what the governor is going to be in terms of what you want to spend next year?
And the reason I ask is not to back you into corner in terms of what you want to spend, but obviously we're seeing a lot of issues here with differentials. And you just talked about where Q4 is going to be versus Q3.
So what's your outlook on 2019, if you don't mind answering?
Ryan Gritzfeldt
We're just going through and finalizing our 2019 capital budget right now. That'll conclude here with the 2018 capital program.
We'll probably put something out in January on that JJ. What I would say is we're committed to that.
We put out preliminary guidance of the $1.55 billion to $1.6 billion capital program and the range and production of 176,000 to 180,000 boe per day. And within that, under the context of current strip pricing and current differentials, we're still within 100% payout ratio.
We're generating excess free cash within that. So as we go through and then high grade here over the - and finalize the program over the next few months, we'll have more of an update post that.
Juan Jarrah
I appreciate that. And as a follow on are you - sorry, did I interrupt someone?
Brad Borggard
Sorry, JJ. It's Brad here.
I was just going to mention - so we when we update our corporate presentation with the quarter, you'll see in there that we highlighted on forward strip still less than 90% payout ratio on our current budget. And when we've gone through and routinely kind of re-cranked the economics, we sort see the potential to shift around a little bit of activity, but overall, we don't see any - at this moment in time, we don't see any significant changes to the preliminary guidance that we put out there in 2019.
Juan Jarrah
I appreciate that. Thanks, Brad.
And as a follow on, what kind of services costs are you seeing for 2019? Are you seeing any deflation or service companies providing you with any concessions and how will that impact your numbers for next year?
Craig Bryksa
Yeah, so to that right now, overall, we're seeing fairly flat numbers. So it's kind of what we're - that's what we've got forecasting into next year as well, so.
Juan Jarrah
Great. That's all I have.
Thank you.
Craig Bryksa
Thanks.
Operator
Thank you. And I am showing no further questions from our phone lines.
I would now like to turn the conference back over to Craig Bryksa for any closing remarks.
Craig Bryksa
Again, I'd like to thank everyone for taking the time today to join our call. If you have any questions that were not answered, you can call our Investor Relations team at your convenience.
Thanks, everyone.
Operator
Crescent Point's Investor Relations department can be reached at 1-855-767-6923. Thank you, and have a good day.